Viasat Inc (VSAT) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2011 ViaSat earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would like to introduce your host for today's conference, Mr. Mark Dankberg. Mr. Dankberg, you may begin.

Okay. Thanks. Good afternoon, everybody, and welcome to ViaSat's earnings conference call for our fourth quarter and year-end for our fiscal year '11.

So, I'm Mark Dankberg. I'm Chairman and CEO, and I've got with me this afternoon, Rick Baldridge, our President and Chief Operating Officer; Ron Wangerin, our Vice President and Chief Financial Officer; and Keven Lippert, Vice President and General Counsel.

Before we start, Keven will give our Safe Harbor disclosure.

Thanks, Mark. Please note that slide two contains our complete Safe Harbor statement. This call contains forward-looking statements that are not actual results and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance. As you know, they involve risks, uncertainties, and assumptions, so future results may differ materially from those expressed on our call. These risks, uncertainties, and assumptions are described at the bottom of today's press release and are further discussed in our reports filed with the SEC.

Okay. Thanks, Keven. So, I'll start out with an introduction and a top level overview, and then Ron will discuss our financial results. And then I'll come back and give a top level overview of our corporate landscape, where we are, where we think we can anticipate in each of our three business segments. And then we'll conclude with an overview of our corporate outlook and a summary.

Okay. So, as an overview, we had our share of challenges in fiscal year '11. We had delays and defense procurements due to budget constraints, and over six months of continued resolutions impacted new order flow for most of the year. Defense areas like our mid-tactical data links and Information Assurance that we thought would grow this past year ultimately didn't.

We had a nonrecurring charge in a government program in our first quarter, which historically, has been a pretty unusual event for us. We had a manufacturing delay on the ViaSat-1 satellite. Going into the year, we knew we'd have challenges in our commercial business because of Ka-band satellite capacity limitations that would limit production shipments. And EchoStar's acquisition of Hughes is eventually going to modify the combination of ways that we bring WildBlue services to market.

But we think we've addressed the challenges well and we have some really positive momentum going into fiscal year '12. Eutelsat's KA-SAT, which is the first of the new high-capacity satellites launched successfully, and we've been testing our next generation ground network with them. We'll go into service this quarter.

We've made really good progress on multiple fronts in global mobile broadband. Our defense Intel surveillance reconnaissance and command-and-control mobile satellite networks are growing fast, and it's a profitable business now. Our contract with JetBlue and LiveTV offers even greater potential in the commercial aviation market, and we're making really good progress in both business jets and Maritime. Our Blue Force Tracking 2 contract is likely to be a strong multi-year franchise, and we received over $70 million in production orders last quarter.

The combination of defense aviation broadband and Blue Force Tracking looks like it will more than cover potential declines in other defense areas, and we believe will grow our defense business at around 10% this year.

We've recently won two important new commercial satellite projects that will show up as new orders, mostly in fiscal year '12. Combined with the availability of these new Ka-band satellites, we anticipate even higher revenue growth in commercial products this year than in defense.

We're expanding our retail reach with WildBlue in our infrastructure to support it. We believe we've made the right resource management decisions and reallocations to control expenses, yet prepare for the anticipated revenue growth we expect this fiscal year. We had record orders of $272 million in the fourth quarter and still have strong orders momentum for the next several quarters.

While Q1 looks a little bit challenging, the strong order pipeline implies a revenue growth outlook for each of our business segments this year. We've had very good cash flow from operations. Our balance sheet is strong and we've got the resources to support our growth initiatives.

So, at this point, I'll turn it over to Ron, who will go over all the financials.

Thanks, Mark. This first chart illustrates the key financial metrics for the fourth quarter and for the fiscal year as a whole. This data was also in the release earlier this afternoon. Overall, company-wide, we achieved year-over-year growth in new orders, revenue, net income, and adjusted EBITDA. Each of those metrics also increased in the fourth quarter year-over-year, except adjusted EBITDA, which was down about 11%, while non-GAAP net income for the fourth quarter was up about 16%.

Fiscal year 2011 earnings were impacted by significant program charges in our Government segment, which we do not expect to recur. Although not presented here, GAAP earnings per share for the fourth quarter was up $0.01 year-over-year, and non-GAAP earnings per share was down $0.02, both on a 13% higher share count.

For the year, GAAP earnings per share was down $0.05 and non-GAAP earnings per share was down $0.16, both on a 24% increase in share count, due to the shares issued in the WildBlue acquisition, the equity financing in support of our ViaSat-1 satellite and anticipated prescriber growth, both of which occurred in fiscal 2011, and the effects of the treasury stock method. We believe the strengthening of our balance sheet this past fiscal year will have a significant positive affect this current fiscal year and going forward.

Results this past fiscal year have been pretty lumpy, so it's helpful to look at the year on a quarter-by-quarter basis. This chart shows that, despite the lumpiness, we've been building momentum throughout the year on each of those key metrics. As we'll show, the growth in the new contract awards over the course of this year is primarily due to our defense business. We'll go into more depth on each of the segments shortly.

So when looking at the fourth-quarter results, while I covered the high-level view of our key metrics, there are a number of important items I want to point out for the fourth-quarter results.

First, this was the first full quarter for comparability with WildBlue included in our numbers. In addition, there are two significant items affecting margins and segment results -- product revenues in fiscal 2011 fourth-quarter were reduced by $5 million for an increase in reserves we made related to various US government cost-type programs. And we also made a $5.2 million reduction to cost of service revenues related to a contract liability acquired in the WildBlue acquisition, and the expiration of that liability. So, product margins are a little worse and service margins are a little better as a result.

Product revenues and cost of revenues in the fourth quarter of fiscal year were lower than expected, due to work stoppage related to a commercial satellite system where our customer is subject to an embargo initiated by the State Department. We filed for the necessary licenses to continue work and be paid, but that process could take several months. We are investing in key antenna technologies, satellite designs, and evolutions to our ground segment, all of which are lowering income from operations.

Some other items worth mentioning are -- our income from operations includes non-cash stock-based compensation expenses of $4.8 million for the fourth quarter of fiscal year 2011, which is about $1 million higher than the same period of last fiscal year. Other income and expenses differences is largely the effect of capitalized interest. We plan to continue to capitalize interest until our satellite-related ground equipment are placed into service.

The income tax benefit for the quarter of this fiscal year reflects the federal R&D credit benefit this year versus it not being in effect in the fourth quarter of last year, and a discreet benefit for the statute of limitations expiring on previously expiring tax positions.

For our year-to-date results, the key points on this slide include -- first thing is the revenue mix. There's a significant shift year-over-year in our revenue sources. Product revenues were impacted by the lack of terminal sales, primarily due to the WildBlue acquisition, and lower government product sales, due to the defense budget continuing resolution process and the delays there, while service revenues include a full year of WildBlue plus expanding mobile broadband sales.

The second area is our margins. Product margins were negatively impacted by the fourth quarter item I previously mentioned, and the $8.5 million contract charge we took in the first quarter related to a government SATCOM program, along with recording that program at 0% margin for the remainder of the year. Service margins reflect the whole year impact of WildBlue, along with the benefit I just discussed in the fourth quarter related to the expiration of a contract liability we acquired with the acquisition of WildBlue.

Some of the other noteworthy items are -- our Selling, General and Administrative expenses increase reflects the full-year effect of WildBlue, combined with higher selling costs in the Government segment, principally due to the increased proposal activities. Our amortization of intangibles increase reflects the timing of the WildBlue acquisition in the third quarter of last fiscal year, and the Stonewood acquisition in the second quarter of fiscal year 2011.

Income from operations also includes non-cash stock-based compensation expenses of $17.4 million for fiscal year 2011, which is $5.2 million higher than last fiscal year. Other income and expense difference is largely the effect of additional capitalized interest. As I communicated previously, once the satellite goes into service in mid-fiscal 2012, we expect interest expense to increase significantly.

Our income tax benefit for the fiscal year reflects the federal R&D tax credit benefit this year, where we had 15 months of benefit compared to only nine months in last fiscal year, and higher qualifying expenditures with the amount of at-risk development we have right now.

Turning to cash flows, we finished the year with strong cash flow generation from operations of just over $46 million in the fourth quarter, rounding out a record fiscal year of nearly $170 million in cash generated, which, for us, is a very key metric. Given our revenue mix of expanding service revenue, combined with our product sales growth, we expect to see cash from operations growing in fiscal 2012.

We used the cash generated this fiscal year to fund capital expenditures, primarily for the ViaSat-1 satellite, the related ground network and network infrastructure equipment, as well as other expansion to support back office systems and the data center at WildBlue in advance of ViaSat-1. And we also used cash for the acquisition of Stonewood Group in the second quarter.

While we borrowed $10 million net in the fourth quarter, we had no net borrowings in the fiscal year. Our previous communications for the total capital cost of ViaSat-1 has not changed significantly. However, with the delay in the launch of the ViaSat-1 satellite, the timing has shifted to the right. For fiscal year 2012, we still have about $60 million net related to the satellite launch in insurance, which we expect to pay in the first half of the fiscal year; and about $35 million remaining for the gateway and infrastructure buildout.

Somewhat of a wildcard is the amount of retail subscribers that we will have during the initial ramp-up of ViaSat-1, and this will also impact cash flows. We do, however, believe we have sufficient cash available under our existing line of credit to handle any surge in retail subscriber ramp-up and the start of ViaSat-2. At fiscal year-end, we had approximately $250 million available under our line of credit.

Turning to the balance sheet, I wanted to make a couple of points here before I turn it back to Mark.

Our balance sheet continues to be very strong. Our liquidity metrics are very good. We have significant tangible assets for a stable borrowing base. We have reasonably low leverage and debt levels. All this provides us with flexibility and options, as we look ahead to additional satellites, higher retail mix of customers, and other investment opportunities, should they arise.

Now I'll turn it back over to Mark, who will talk about our business areas, our outlook, and provide some summary comments.

Okay. Thanks, Ron. So, with that financial data for fiscal year '11 as context, we'll take a high-level view of our Company landscape.

We anticipate growth in key metrics for each of our three business segments -- defense, commercial, and satellite services. But when we think about comparing earnings, we need to take into account the effects of the timing of the ViaSat-1 launch, which is planned for July, and the expansions in our capital structure to grow the services business.

Our defense business is poised for revenue growth. We anticipate to be around 10%. And that's supported by a healthy growth in our government backlog over the past year. Our ability to grow defense revenues in a very difficult defense procurement environment derives from a evolving product mix, driven to a greater extent by Blue Force Tracking and the airborne Intel surveillance and reconnaissance. Both of those areas seem well-positioned for significant, sustained growth.

We also anticipate that defense margins will return to historical levels. The combination of revenue growth and return to historical margins would yield significant year-over-year earnings growth in fiscal year '12 for the Government segment.

The Commercial Networks business seems poised for even higher revenue growth as a percentage in fiscal '12, based on several factors. First, is the availability of bandwidth on KA-SAT and ViaSat-1, which would facilitate shipment of Ka-band user terminals at higher levels than we've seen the last couple of years.

We've also recently won significant commercial projects, including MEXSAT with Boeing, and a new Ka-band payload module program with Thales for the Iridium NEXT satellite constellation that we began this quarter. We're also experiencing good growth in global mobile broadband equipment orders for business jets, Maritime, and we'll be beginning commercial aviation programs with JetBlue this year, and expect to begin with United's Continental Airlines also.

The anticipated revenue growth would improve the bottom line for the Commercial segment, but we don't expect it to be profitable in fiscal '12, due to production startup, transition effects, and R&D investments. We're targeting meaningful subscriber growth in fiscal '12 for WildBlue services after a flat fiscal '11. But the bottom line there is going to be impacted by network expansion costs that are triggered by the ViaSat-1 launch. We'll go into more detail on that in the Services segment.

So let's look at government first. What we did is we put together a slide that compiles annual data for the past three fiscal years, and indicates the anticipated directional outlook for the next two fiscal years, shown by the arrows in the boxes. The defense environment has been pretty difficult the last couple of years and it's been hard to forecast.

Revenues have been essentially flat the past three years, but orders show a little different story. We had record orders in fiscal '09, but about an 8% decline in fiscal '10; but then we set new record orders for defense in fiscal '11 -- about 12% over fiscal '09, which had been the prior record, and up over 20% on a year-over-year basis, relative to fiscal '10. Our defense backlog is at a record of [$284 million] and that builds confidence in the 10% year-over-year government revenue growth outlook I mentioned.

EBITDA in the segment had been flat on the flat sales, but the program adjustment charge we incurred in the first quarter, along with the subsequent zero margin revenues on the program for the next couple of quarters, caused a year-over-year decrease in defense earnings.

With that behind us and a backlog consistent with historical margins, we anticipate substantial growth in the government EBITDA fiscal year '12. Both from fiscal year '12 to '13 would be anticipated to reflect year-over-year growth in the revenues at similar margins. We recognize that even 10% revenue growth in the current defense environment is pretty unique. And so we'll talk about the drivers behind that next.

The defense procurement environment has been difficult, with a long delay in approving the government fiscal year '11 budget, and the associated continuing resolutions made planning and forecasting rather difficult. It's also made it hard to align government spending with new policy initiatives, and that led to uncertainty and sluggishness in procurement programs overall.

That's still a big issue, and DoD continues to wrestle with budget constraints, overruns on big programs, as well as the war efforts. Those factors are reflected in the outlooks of most all defense contractors. But within DoD, communications remains a relative bright spot and within that, situational awareness and Intel surveillance and reconnaissance, or ISR, especially so. Those are the two areas that are driving our backlog growth. In particular, the Blue Force Tracking 2 contract and broadband mobile satellite for ISR applications.

While we still see positive market forces [to INR] MIDS tactical data links and MIDS Joint tactical radio system, as well as our Information Assurance businesses, the volume and timing of orders in those areas has been below our expectations. There remains potential upside in each of those two areas relative to our current expectations. In particular, the progress and maturity of the MIDS JTRS radio is noteworthy, given the continued program overruns in the other joint tactical radio system program elements.

We're also making inroads into new Information Assurance cybersecurity markets. And we think there is pent-up demand for the MI network encryptors [IKG-250's] and the inline media encryptors as well. But despite these overall defense headwinds, we received a $70 million-plus order for Blue Force Tracking 2 units in our fourth quarter, and we see the further upside in that area for network expansion, additional markets and additional services. We are also encouraged by the integration of the [Loop and] Tracking System Program into the Blue Force Tracking program office, as well.

Our rapid growth in government SATCOM, ISR leveraging our commercial archive products, and Yonder Global Mobile Networks has been a great success story of the Defense Department adopting commercial off-the-shelf technologies to fill voids in organic capabilities.

Our defense customers are very interested in our Ka-band systems as well. We obtained Ka-band with access rights in the Middle East that can substantially improve the operational capabilities and cost-effectiveness. Ka-Band with their -- will also augment existing Ka-band coverage in the US and Europe. This area has good growth potential, as we increase the number of types of platforms we support; the numbers of platforms; the number of organizational elements that are using our networks; the breadth and depth of geographic coverage; the functional capabilities of the network; and as international allies and coalition partners get exposed to the capabilities.

ISR, we think, is a real bright spot within DoD and especially so for our broadband mobile satellite business.

Finally, we believe that the business mix, indicated by our existing backlog and anticipated new order flow, is consistent with historical margins, which, as we've already mentioned, creates the opportunity for strong year-over-year earnings growth in this segment.

Now I'll turn to a similar view for our commercial environment. And this one has a few more moving parts to consider. Looking backwards, we had strong contract awards, primarily for network infrastructure and projects in fiscal '09 and in fiscal '10. In fiscal '10, we were able to grow EBITDA in backlog despite relatively flat revenues; but fiscal '11 saw a falloff in these new infrastructure project starts and lower sales of user terminals, due to the lack of Ka-band bandwidth capacity and our acquisition of WildBlue.

We also made a conscious decision to curtail subscriber additions on WildBlue due to bandwidth congestion, and our distributors aimed at working down terminal inventory in anticipation of the ViaSat-1 launch in the next generation of network equipment. So EBITDA in fiscal year '11 fell correspondingly, and also reflecting investments in R&D associated with the next generation of ground network equipment and mobile.

Looking ahead, we anticipate good growth in orders and revenue for fiscal '12, albeit with only slight improvement in EBITDA, partially as a result of the delayed launch of ViaSat-1, as well as expected transition support costs as we go into volume production. The new project starts with Boeing on MEXSAT and Thales on Iridium NEXT will help grow revenues and contribute to bottom-line improvements. In fiscal '13, we see opportunities for further growth in orders in revenues, and we do anticipate positive earnings for the segment.

We'll discuss the underlying factors that drive this next.

So there's several market environment factors that contribute to our views. A very significant one, of course, is the launch of ViaSat-1 and KA-SAT, which creates the bandwidth capacity needed to grow subscriber accounts and drive the terminal sales. KA-SAT is expected to go into service the end of this month, and we're in the process of starting to put user terminals into the distribution channels that Eutelsat has developed already.

ViaSat-1 is planned to go into commercial service in October. Our initial year of production on our original surfing networking terminals involve a number startup and sustaining engineering costs, and we're anticipating the same here.

We've also been awarded those two new significant satellite projects. We talked about MEXSAT last quarter, when we received an initial authorization to proceed on that project. It's a follow-on with Boeing for another ground-based beam-forming system for mobile satellite system, much like the one we delivered to Boeing for the light squared satellites. That project was very successful, and allowed Boeing to deploy and test probably the world's most sophisticated mobile satellite services Antenna Systems faster than anyone had ever done before.

We recently also won a new project for Ka-band communications payload modules with Thales for the Iridium NEXT satellite system. We're beginning work on that this quarter. We think it's also an important capability for growing our Ka-band payload technology. So our satellite project revenue for fiscal '11 -- for fiscal '12 will be significantly higher than it was in fiscal '11.

Finally, our global mobile business is growing nicely. We've seen a strong rebound in the business jet market. Based on shipment data for new production Gulfstream business jets, it looks like our market penetration is the highest it's ever been. We're also seeing very nice growth in Maritime ArcLight modems working with KBH, who is seeing good demand for their new track phone B7, the smallest, lightest Ka-band Maritime broadband VSAT terminal.

We're under contract with JetBlue for Ka-band in in-flight broadband in the US. JetBlue's LiveTV subsidiary executed a Memorandum of Understanding with United's Continental Airlines to upgrade their fleet of DirecTV-equipped jets with KA-broadband as well. We've got agreements with Eutelsat and Yahsat to create global roaming plans. And we believe that will add further momentum to both our commercial and government broadband mobile business.

And now that those Ka-band high-capacity satellites are becoming a reality, we're seeing a higher level of interest for other applications that use Ku-band FFS satellites. It's been a while in the making, but we see good indications that in fiscal '12, we'll begin really seeing the impact of the Ka-band revolution we kicked off three years ago.

Of course, the most significant benefits of ViaSat-1 and the new Ka-band networks are anticipated to come in our satellite services business segment. ViaSat-1 provides the bandwidth fuel it takes to grow subscribers, improve customer satisfaction, and expand our addressable market, both within the consumer broadband market and into adjacent markets, like aviation.

ViaSat-1 is scheduled to launch in July. All of the functional and performance satellite testing is complete. All of the results of the tests are consistent with meeting or exceeding our original expectations for satellite capacity and performance.

The only remaining factory tasks are a final cycle of mechanical integration, and assembly and testing and shipping preparation. We're planning for the satellite to be on orbit and available for commercial service in October. We're targeting meaningful subscriber growth for WildBlue this fiscal year; but given the timing of the start of the ramp within the fiscal year cycle, it's not going to have as big an impact on revenue growth as it will in subscriber additions. We'll recognize significant startup expenses in fiscal '12 and that will hit EBITDA as well as earnings.

So we'll go into more depth on these issues in the next two pages, but for starters, the way to think about it is take the plans that we set out with ViaSat-1, and then time-shift them about five months to the right, due to the satellite construction schedule. That makes fiscal year '12 results significantly lower than they would have been with the launch earlier in the year, but still positions us to achieve very attractive returns in fiscal '13.

So this slide is intended to help model the financial effects of a July ViaSat-1 launch date on our fiscal '12 results. The effects are driven by several factors. One key point is just understand the effects of taking the same revenue growth and expense trajectory profile, and then time-shifting it within the fiscal year.

It turns out that while, of course, we want to launch as soon as possible, doing it in July has about the worst negative effect on fiscal '12 of any point in the year. It gives the worst combination of incurred post-launch depreciation and interest expenses with the minimum -- with the smaller amount of offset revenue, due to the same subscriber ramp. It's about $10 million worse in fiscal '12 than it would have been with an April launch, for instance. The chart also shows that if the launch were delayed until longer next spring, FY '12 would be much better too; but, of course, that would make no sense for the long run.

Overall, in modeling the effects of the ViaSat-1 launch on fiscal year '12 results, we need to take into account the uncovered infrastructure costs due to the commitments we made prior to the manufacturing schedule slip. That was about $12 million to $15 million, as we discussed in our third-quarter call. About $8 million to $10 million of that will be incurred in first and second quarters, and operation startup costs will be about $4 million to $5 million also in those first and second quarters.

Then offsetting that, we'll have a -- the delay in the launch pushes some of our cash payments into fiscal '12 that otherwise would have been made sooner. And Ron described that we have about $95 million in satellite and ground cash expenditures in total remaining on the project in fiscal year '12. But that amount lowered our fiscal year borrowing needs relative to our prior plans.

The launch delays benefit fiscal '12 in incurring some depreciation and interest expenses, but it pushes back the bow wave of revenue growth more into fiscal year '13. So the amount of interest and depreciation covered by revenue is actually smaller. And that's the effect that's shown in that curve.

We're also now modeling at our historical trend of 50% retail on the wholesale/retail mix, which is higher than we had been modeling previously. The incremental SAT costs had some negative impact on fiscal '12, but a positive impact beginning later in fiscal '13. And we'll talk about that more on this next slide.

So here we'll talk about an update on our go-to-market approach to achieve our subscriber growth plans.

While we expected essentially flat subscriber levels for WildBlue in fiscal year '11, we are really targeting growth this year. The first step there is to begin offering services under the RUS, the Rural Utility Services' stimulus plans later this quarter. Our objectives for those are relatively modest in the context of ViaSat-1. We anticipate it will increase subscriber levels faster sooner in the western US, even prior to ViaSat-1.

We're still refining our new ViaSat-1 service plans, and we may continue to do that up until the service launch. But the basic offers still center around three to four times the current WildBlue speeds at comparable price points. We expect to come to market through both retail and wholesale distribution channels. The chart on this page shows that for the past five years, WildBlue has run pretty much at a 50/50 retail/wholesale subscriber mix. And note that that was true even when WildBlue brought on Dish as a distributor in calendar year '07, and then again when we added DirecTV, and they began selling in calendar year '08.

So we think that's a good starting point to forecast new adds for ViaSat-1, too. If ViaSat-1 were aiming at gross subscriber addition run rates that are a little bit higher than WildBlue achieved in 2007, when there was significant new bandwidth capacity based on the launch of the WildBlue 1 satellite.

So we've done several things to prepare for that. We're expanding our retail distribution network. We expect to have more dealers to sell WildBlue service than ever before. We've upgraded our back office infrastructure and billing system substantially, too. And we have the financial resources to support subscriber acquisition costs at these higher run rates, too.

But we're also really excited about the wholesale opportunities, too. We see both NRTC and DirecTV as valuable and motivated partners with strong and enduring customer relationships. Both see the potential to expand the market for satellite broadband, with higher speeds offering a more compelling value proposition. And even though EchoStar is acquiring [views], Dish is still engaged in discussions with us to market ViaSat-1 services, as Dish broadband, in the time interval before the EchoStar service is available, and conceivably beyond, as well.

So we don't underestimate the challenges of achieving our growth targets, we're pretty pleased to see the elements falling into place. It looks like the market environment and the factors at the outset of launch will be pretty much in line with what we anticipated when we started the project three years ago.

Okay. So that kind of covers the segments. This slide gives some context to think about our key corporate financial metrics over the next couple fiscal years.

We see new orders growing over the next couple of years. In fiscal year '12, that will be driven by Commercial Networks products and defense. Broadband services will grow sort of modestly, given the timing of the ViaSat-1 and the subscriber ramp-up. In fiscal '13, Satellite Services would be a much more significant contributor to orders growth.

We see good revenue growth in each of the next fiscal years, next two fiscal years, again driven by product and project revenues in government and commercial in fiscal '12, with broadband services contributing meaningfully in fiscal '13. We expect modest EBITDA growth in fiscal '12. Defense, through the combination of revenue growth and anticipated return to historical margins, creates a significant tailwind.

We believe commercial products will have a more modest contribution to year-over-year EBITDA growth. But startup expenses, excluding depreciation and amortization, will create a substantial headwind, but the overall year-over-year EBITDA gain for fiscal '12 will be relatively modest. We believe fiscal '13 should provide very significant EBITDA growth due to the cumulative effect of the subscriber growth from fiscal '12, as well as additional growth in subscribers in fiscal '13.

Operating income is expected to contract in our fiscal '12 due to the ViaSat-1 depreciation and amortization expenses. That will make the Satellite Services segment unprofitable that year. But we believe there will be a significant rebound in operating income and earnings per share in fiscal '13, the first full year of ViaSat-1 service.

Okay. So to summarize, we feel like we're entering fiscal '12 with good momentum, and we believe we'll achieve good revenue growth in all of our business segments. In defense, fiscal '11 was a record year for orders, over 20% higher than fiscal '10 and just about 20% higher than revenue for the year, as well. The mix is evolving, and we're seeing fast growth in Blue Force Tracking and satellite mobile broadband. We still are long-term optimistic about MIDS, joint tactical radio system, and Information Assurance, but the orders there have been delayed, and we model those as flat to down in our fiscal '12.

Our government backlog is consistent with the return to the margins we've seen on a historical basis, and we think we've allocated resources to achieve that. The outlook for revenue growth is higher on a percentage basis in the commercial area, due to a combination of factors. First is that Eutelsat's KA-SAT will enter commercial service this quarter, creating a market for user terminals. And ViaSat-1 is planning to be in service for the second half of fiscal '12, creating a market for terminal sales to wholesale distributors.

We've also won three pretty big new projects between fiscal '11 fourth quarter and this fiscal '12 first quarter, totaling over $115 million in value. That's MEXSAT with Boeing; Iridium NEXT with Thales; and the JetBlue LiveTV contract. And we're also working with LiveTV to definitize the agreement to upgrade United's DirecTV-equipped Continental fleet to broadband, which is another couple hundred aircraft. And we're seeing good growth in business jet and Maritime mobile, too.

We anticipate an improvement in the bottom line in commercial, but still don't expect it to be profitable this year, due to the production transition costs, ViaSat-1 timing, and mobility investments.

Then the big event is the ViaSat-1 launch planned for July. That's the main engine of long-term earnings growth for us, but the timing of the launch from an FY '12 perspective is really difficult. We believe the elements are in place to begin rapid subscriber growth after launch, and that creates an environment in selling, creating revenues and earnings in fiscal '13.

That's our prepared remarks. At this point, we'd be happy to take questions.

(Operator Instructions) Matt Robison, Wunderlich.

Can you help us a little bit to try to at least range the modeling for subscriber acquisition costs once you launch in October?

In terms of -- can you clarify the question? I mean, are you looking at -- our typical SAT costs range in that $600 to $700 range. Do we expect any significant delta with that? Is that what you're asking?

Yes.

I don't think we expect any significant shifts. I think the shift that we're talking about is the retail wholesale mix. With our wholesale subscribers, we don't have any subscriber acquisition costs. We're providing -- we're selling the customer premise equipment to the retail distributor. But when we're the retailer, then we will incur the subscriber acquisition costs.

So I don't think we expect to see a significant shift, only that we expect the volume to increase. And that will create a greater amount of near-term expenses, because we do expense a component of those subscriber acquisition costs when we sign up the subscriber.

I would caution you, though, Matt, that those subscriber acquisition costs range depending on our distribution partner, what the offerings are. I'd say they go anywhere from $400 to $800. But kind of more in the range that Ron was talking about on average. But it's a pretty broad range depending on what the specific offering is.

And what other confluence of incremental SG&A should we anticipate starting in --?

Certainly, we'll increase advertising and upfront when this thing gets started. Those things I think we've talked about quite a bit -- the increased elements; we've talked about the backhaul cost; component before, but that starts stepping up. It actually started this last quarter. And we'll step up over the year to be running at about $1 million a month run rate by the end of the year. And then grow from there as we build out the network. But there will be other costs that will flow through there from, for instance, our billing costs as the subscriber's ramp up and incremental call center costs. Those will all be in there.

Actually, those are actually as a -- on a per-sub basis should decline as we ramp subscribers.

The backhaul will show up on the SG&A?

No, that shows up in cost of sales.

Cost of sales.

But the advertising is still something that's TBD?

Yes.

Okay. That's all I've got for now.

Jim McIlree, Merriman Capital.

Can you talk about why the service revenue was up substantially this quarter versus the prior quarter?

So there's probably two components. One is the mix of wholesale versus retail. We have a higher mix of retail, that's driving it higher. And then we also have higher mobile broadband revenue as well. I mean, the total number of subscribers for WildBlue was relatively flat; we just had a greater mix of retail, which carries a higher ARPU. And then the residual is the mobile broadband higher revenue from the network.

Okay. And Mark, in your prepared comments, you talked about -- or maybe Ron, you talked about a $5 million reserve in the government program. Can you just explain a little bit better what that is? Was that for the same program that you had the issue with in Q1?

So, the dollar amount was $5 million. And it was an increase -- we increased some reserves related to potential cost adjustments on several US government cost reimbursable programs. And that resulted in the reduction in both revenue and earnings by that amount. And it's -- we looked at several factors in the quarter, primarily due to the regulatory environment as well, we thought it was appropriate. We'll have some expanded disclosure on that in our 10-K.

It had nothing to do with the previous contract we had or any projected performance problems on our programs.

Correct.

Okay. And my last one is -- I think in the last call, you had talked about commercial revenue upwards of 50% growth. It kind of sounds like you're backing off on that. Am I interpreting that correctly?

We're not backing off on it. I would say from an absolute dollar standpoint, I think the mix is going to change a little bit from some of these other programs versus we thought more would come from terminals. And I have a feeling -- we believe now that a greater percentage will come from some of these new projects -- (multiple speakers) which have lower margins.

Okay. Okay, great. So percentage-wise, kind of the same but a mix shift to lower margin stuff?

Yes.

Great. Okay. Thank you. That's it for me.

Tim Quillin, Stephens.

Thank you for taking my question. I'm not quite sure I understand exactly what the reserve is for on the cost plus contracts. And then I'm also not quite clear what the benefit was on the service side. If you could maybe just, on the reserve, just go over that in a little more detail and then maybe expand on the service benefit.

Sure. So we have a number of multi-year, US government, cost-reimbursable contracts. We've been looking at our overhead rates and other rate factors that go into competing the costs that are reimbursable on those programs over the past several years. And we determined that, given some of the changes in the regulatory environment that we've been seeing with how products are being interpreted, and the government is looking at certain costs that it would be appropriate to basically reduce the amount of expected revenue on those programs, through a revenue reserve.

And then again, it's spread across several programs across several years. And it's really the byproduct of that. It's really you're seeing this go on across the entire government industry. So I think if you look at other 10-Q's over the last year and other changes in risk, you're seeing a pretty broad sweep of this occur across all government contractors. It's not [just] ViaSat.

So you're just being more conservative about what you think will be reimbursable via government on it?

Yes.

Yes.

So then on the benefit in the service segment, fundamentally, we had a contract that we acquired in the WildBlue acquisition. And the liability component, a liability component associated with that contract expired during the quarter. And as a result, we took down the liability that was associated with that contract.

And so what was the dollar impact on that in the quarter?

It was $5.2 million.

It was $5.2 million. Was that a full quarter amount that will carry through?

It was -- the $5.2 million does carry through the quarter and the fiscal year from a (inaudible). That's it.

Okay. And then in terms of your strategy, I mean, it kind of -- it sounds like your distribution -- at least at this point, your distribution channels have not changed in terms of, it sounds like Dish is still committed to selling your product. And it sounds like maybe you're thinking about going down that route; but yet your strategy is shifting more towards retail.

So maybe if you could talk about whether that is more a function of you thinking that's a long-term more profitable strategy versus not wanting -- not trusting the wholesale distribution channel as much as you did previously.

No -- so what I will tell you is it's sort of unknowable how the distribution will work out. We look at the return on subscribers -- we look at two factors. One is the margins that we get. But the other is also the time value of money. So if we can fill up the satellite faster, even with lower margin subscribers, through wholesale channels, that's a good thing, so far as we're concerned.

What we've done is we just went back and looked at what happened with WildBlue. And when they lost WildBlue 1 back in 2007, coincident with that, they brought Dish on as a distributor. So they went from -- at that point, WildBlue went from its own retail plans plus NRTC to adding Dish. And Dish grew fast, but actually the overall market demand also pulled through a lot of retail as well. And it turned out, as you can see from the chart, that even when they added Dish and when they added DirectTV, that there was still a lot of retail demand as well.

So I'd say we've sort of updated our model. And then the reason we're doing that is because the wholesale/retail mix impacts the earnings for FY '12. And modeling it to be more 50/50 I think is a more conservative view of what it will be.

Now that said, obviously, both Dish and DirecTV are very, very good channels. And we'd like to use them. And what I would say with Dish is, Dish would like to have an enhanced broadband services product to offer as a Dish broadband product. And the Hughes/EchoStar enhanced version won't be available for quite a while after ours goes into service. So Dish has asked if they could distribute that, if we could do a distribution agreement.

And I would say for good reasons, there's actually some reason to believe that it would go on even after the Hughes EchoStar launch, although obviously, to a lesser extent. So, yes, so we're talking to them about doing that. If that works out, that'd be really good.

And does the retail or greater reliance on retail then -- is the plan to fill to capacity faster that way? In other words, do you still have the same expectations in terms of wholesale subscriber additions, but now your additive with retail?

So what we've done is we're targeting a ramp that we've described in the past, that could get to 30,000, 40,000 gross adds a month, kind of that range. It's a little higher than what WildBlue has done in the past. And what we think is it's the same subscriber base; it's a lot of the same installer base. There's limits on the amount that you can install.

The thing that we think is a little bit unknown and unknowable is the mix that we'll get. So what we're saying is we think we're going to go to market with a good mix of wholesale and retail, good plans. And we're prepared to the extent that a lot of that becomes retail, that we can [serve], both from a retail point of presence perspective and basically funding all the subscriber acquisition costs, even at that higher run rate.

And I think that -- I mean, that's about as much as we actually know at this point. Because in some sense, there's overlap among the different channels for contending to try to get the same type of subscribers.

Right. And just one last detailed question. You mentioned some de-bookings in the press release. And how much of that was Yahsat? Or was there other de-bookings as well? Thank you.

It was just Yahsat, which we'd talked about previously. And I think that the reserve adjustment that Ron described for the government cost contract has the equivalent effect of booking a little bit of backlog.

Correct.

(multiple speakers) Okay. Thank you.

Mike Crawford, B. Riley & Co.

One thing regarding your distributors today. So they're working down their terminal inventories to prepare for the next generation terminals and service, but is there any right to return any of that to you? Or what is the state of that terminal inventory at distributors?

No, I mean, once you've bought it, you bought it. But I think we're working with them to try to understand. What we don't want them to do is end up with a bunch of old inventories, so we're trying to manage that with them. There's plenty of demand for the other product that's out there. So I'm confident that we'll still have to make more of it, Mike. And we still have [surfing 1] network out there. So I don't foresee an issue here where there's a bunch of kind of dead, stranded inventory.

Yes. The other point I'd add to that is, once -- when you think about ViaSat-1 providing bandwidth in the territories covered by the existing satellites, we can reproduce some of the plans that we would offer on the new satellite on the old satellite, using the old equipment. The bandwidth becomes sort of the lower of costs to replacement at that point. So that gives us [quite a maneuver here]. We don't really see an issue.

Okay. And regarding government and especially DoD demand for satellite bandwidth, so there's been, I think, some increasing recognition that they need much more than that just buying it in bits and pieces from the commercial sector might not be the best way to go. Is there any progress being made on doing something as wild as building a satellite basically for the government or anything close to that level of commitment?

So I would say growing awareness, it's kind of like two steps forward, one step back every time you try to change that. So there are programs within DoD that are looking at that, especially for what they call unprotected bandwidth. And I think it's going to happen in some ways, but it's not totally clear exactly. The program isn't defined the right way yet.

And when you said you obtained access rights in the Middle East, that's specifically the roaming agreements with Eutelsat and Yahsat, or is there something else?

No, we also announced an agreement with Asia Broadcast Satellite on what they call ABS-7, which has Ka-band that covers the Afghanistan/Middle East region. And we made an agreement with them that gives us exclusive rights to that. And that is really targeted at the specialties ISR applications -- Ka-band ISR.

Okay. And then final question relates to once ViaSat-1 is put into commercial service, I think you said you think that will be in October. A, if that's right; and then, B, if that is when it will be available for the commercial flight applications?

Yes. So, we expect the satellite to be in service in October. For JetBlue and the commercial aviation, the long pole in the tent there is integrating the terminals themselves on their aircraft and getting the FAA flight worthiness certifications. So we're actually intending -- expecting that JetBlue will go into service almost a year later than that -- kind of in the fall of 2012, to start their services.

But there are other services, other commercial services that we're working on that would be able to start sooner, because they don't require that FAA flight worthiness certification.

Okay. Thank you.

Our last question comes from Ryan Rackley from Raymond James. Your line is open.

So, looking at your defense margin guidance, are you expecting the higher selling costs to decline in 2012? Or is it purely a mix that gets you to the mid-teen margins?

It's more of a mix. I mean, there are still a lot of proposal activities that are consuming new business funds. But we do have higher margin products in backlog, and the pipeline of the future orders tends to carry a higher level of margins. But we do expect our selling costs to continue to be high, given the amount of things that we're working on.

Right. And so looking at EBITDA guidance from a company-wide standpoint, you mentioned the commercial mix. Is there -- well, I guess, in regards to the EBITDA guidance, which seems to be a little lower, is any of that change coming from defense? Or is it all the commercial business mix, relative to that quarter?

We're seeing EBITDA and plus for EBIT, so you go back to the other piece of that on commercial being back at historic margin levels.

For defense, for the defense business.

And on the commercial, basically, I think what we said is we see pretty much a similar in the commercial business of the year. And then that growing in '13. But we saw the decline, the primary decline in this year -- as it has been always. It's just more exaggerated because of the schedule slip in the satellite, but a decline in satellite services related to the startup costs associated with that.

Okay. But your EBITDA guidance didn't come down relative to last quarter due to anything in the Defense segment?

The only thing that changed from last quarter -- and I think we don't -- we haven't been giving guidance -- but the only thing that changed from last quarter for this year was the mix assumptions. You know, the announcement that EchoStar was buying Hughes came subsequent to our last quarter's call, and the implications that has on our mix.

And if we start up with a higher retail mix, there's higher expenses in the current year than perhaps what some of the people have modeled out there. So we've had those discussions all along with a bunch of folks, and I really haven't seen any updated projections so far by the analysts incorporating those elements.

Right. But I would say -- I'd put that mix of wholesale/retail sort of in the unknowable category. And that's why I said for conservatism, if you just look at historicals, which have been about 50%, that'd give you a more conservative view of EBITDA for next year -- but because of the SAT costs.

And the other thing I would say is that, although our new order flow has been really good, and we actually expected, as Mark mentioned earlier, a very good start to this next year in new order flow, some of these things like Blue Force Tracking have longer-term impacts. And the dearth of orders for a while has showed up more recently in some of our outlook. Q1 is -- the revenue and earnings impacts on Q1 are more dramatically negative than the rest of the year. So I think Q1 is a tough quarter for us. The rest of the year looked significantly better. It's kind of a step function in Q2 and on.

Got it. And finally looking at the JetBlue deal, can you talk about how you expect to monetize this service portion of that business? Is it something you charge by the gigabyte or by the GPE or --? Just provide some color there.

And also, whether or not you're providing any hardware other than the modem? Are you selling the antenna as well?

Okay. Yes. So with JetBlue -- and it'd be the same for the rest of the commercial aviation -- we'll provide a terminal onboard the aircraft, which is the antenna, the RF system and the satellite modem, and maybe a little bit of the networking functions.

We're working with LiveTV, and LiveTV will provide the in-cabin WiFi distribution primarily, and they'll do integration -- because it will share some satellite elements with the DirecTV systems that are already onboard the aircraft that are currently planned for service.

The ongoing service agreement has a strong volume component to it. So it's really based on the amount of bandwidth that's used by the passengers, and that's the basis of it. There are nuances around that, but basically, what you could look at is, if lots of passengers -- what JetBlue has described is an environment where they're really seeking much higher engagement of broadband. And you've seen on current broadband in flight broadband services. So you get a lot more penetration but a lot lower cost per passenger.

Overall, we think that's a good -- it's a really good model for us. And it should be a really good model for the airlines as well, because cost per passenger is really low and the engagement to be high.

That helps. And you guys -- and you're still on track for 2012 installations for that, the JetBlue?

Yes. But as I mentioned before, the real long pole of the tent being terminal integration onboard the airplanes and FAA flight worthiness designations.

Got it. All right. Well, thank you, guys.

Thank you. We have no further questions. I would like to pass it back to the presenters for closing remarks.

Okay. Well, thanks. So that concludes our prepared remarks and the Q&A session. And we'll look forward to speaking again next quarter, post-launch. Thanks a lot, everybody, for listening.

Ladies and gentlemen, thank you for participating in today's program. This concludes the program. You may all disconnect.